The Financial Industry Regulatory Authority (FINRA) has fined Merrill Lynch $6 million for Regulation SHO (Reg SHO) violations and failures to supervise. According to FINRA’s announcement on October 27, 2014, it censured and fined Merrill Lynch Professional Clearing Corp. (Merrill Lynch PRO) $3.5 million for violating Reg SHO, which is an SEC rule governing short sales and aimed at preventing abusive naked short selling. Additionally, FINRA also censured and fined Merrill Lynch, Pierce, Fenner & Smith Inc. (Merrill Lynch) $2.5 million for inadequate supervisory practices.
According to FINRA, from September 2008 through July 2012, Merrill Lynch PRO failed to take action to close out certain fail-to-deliver positions, as required under Reg SHO. Further, Merrill Lynch PRO did not have appropriate systems and procedures in place to address the Reg SHO close-out requirements during most of the time period.
FINRA also found that from September 2008 through March 2011, Merrill Lynch’s supervisory systems were inadequate and improperly permitted the firm to allocate fail-to-deliver positions to its clients based upon the clients’ short position and without regard for which clients caused or contributed to the firm’s fail-to-deliver position.
FINRA’s Executive Vice President and Chief of Enforcement, Brad Bennett, said “Firms must ensure that their supervisory systems are designed to address and ensure compliance with Regulation SHO. In these cases, each firm’s failure to establish systems and procedures to properly close out its fail-to-deliver positions could have potentially negative market impact, which could harm investors.”
In order to protect investors, FINRA rules require broker-dealers to establish and implement a reasonable supervisory system. These rules require supervisors to monitor firm activities to ensure they comply with federal and state securities laws, securities industry rules and regulations, as well as the brokerage firm’s own policies and procedures. If broker-dealers do not establish and implement such protective measures, they may be liable to account holders for damages stemming from a lack of supervision. As a result, investors can bring forth claims to recover damages against broker-dealers like Merrill Lynch, which have a fiduciary duty to protect their customers’ interests.
Have you suffered losses in your Merrill Lynch or other investment account? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
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